Buyers Beware of the Finance Clause
Updated: Mar 9, 2021
In a Standard REIQ (Real Estate Institute Queensland) Contract there are conditions which cover finance, building & pest inspections and pool safety inspections. These conditions create an ability for the buyer to terminate the contract after taking reasonable steps of enquiry.
Clause 3.1 in the current contract states:
The Contract is conditional on the Buyer obtaining finance approval of a loan for the Finance Amount from the Financier by the Finance Date on terms satisfactory to the Buyer. The Buyer must take all reasonable steps to obtain approval.
The District Court of Queensland recently considered the meaning of “satisfactory” and “reasonable steps” with regards to Clause 3.1 in the case of in Hauff & Anor -v- Miller. In this case there were two contracts, one for the building and one for chattels. The building contract was subject to finance with the nominated financier being ING Bank. The buyer didn’t make an application with ING however and applied for finance from an alternate lender. Finance was not obtained by the due date and the buyer terminated under Clause 3.1. The seller’s took action against the buyer alleging a breach of Clause 3.1. The Court determined the buyer had not taken reasonable steps to obtain finance approval from the nominated financier. Accordingly, the sellers were entitled to retain the full deposit from both contracts and the buyers were liable for damages and costs.
Buyers must ensure when entering into a contract the conditions are correct and in such case where an alternate financier is preferred to at least request the seller to agree to alter the financier’s details in the contract. If agreed this will ensure that should the buyer’s finance be refused, the option of terminating the contract under Clause 3.1 is still available.
A good tip if you are a buyer is to obtain pre-approved finance from your selected institution prior to entering into a Contract of Sale. This will ensure fewer delays for your finance under the terms of the Contract. Buyers should also ensure there is sufficient time allowed in the contract for them to actually obtain finance approval. We are currently seeing this take up to three weeks from some of the banks.
Keep in mind every contract is different. You should fully understand the terms of your contract before you sign. Some contracts for example deem the Buyer’s finance as approved if they haven’t terminated by 5pm on a particular day. In this case if finance is not actually obtained the Buyer will still be liable to complete the contract and if they can’t settle will probably lose the deposit and be liable for damages.
Ideally, you should have your solicitor review the contract before you sign as some problems simply can’t be fixed after the agreement is formed.